By Ambrose Evans-Pritchard
French leader François Hollande is uncomfortably close
to a collapse in credibility. His poll rating has sunk to 36pc. The speed of
decline has been shocking.
The latest broadside comes from ex-German chancellor Gerhard Schröder,
supposedly his ally on the Left.
"The election promises of the French president are going to shatter
on the walls of economic reality," he said in Paris.
The backsliding in the retirement age is indefensible and "cannot
be financed". Two or three more blunders of this kind and "reality
will catch up with out French friends".
Mr Schröder knows what it takes to claw back competitiveness. He lost
his chancellorship on the Hartz IV labour reforms.
This tale of political sacrifice can be exaggerated of course. The Hartz
IV reforms are not the chief reason why Germany is super-competitive today
within EMU. The country’s hiring and firing laws are among the least reformed
in the OECD to this day.
The Teutonic machine regained a labour edge by screwing down wages for
year after year (as companies like VW threatened to relocate plant to Eastern
Europe). It was an internal devaluation. Hartz IV was the icing on the cake.
Be that as it may, there is no doubt that Berlin is seriously worried
about the strategic direction of France. Le Figaro – which now seems to launch
daily attacks of considerable ferocity against the hapless Hollande – had a
two-page spread today on German disgust with the new sick man of Europe.
The French are living in Alice and Wonderland. Bild Zeitung asked
whether France is becoming the "new Greece". You get the drift.
The business lobby Medef warned two weeks ago that the country is
heading into a "hurricane". It said Hollande is making a disastrous
mistake by slapping on extra business taxes and pushing the top rate of capital
gains tax to 62pc. (compared to 21pc in Spain, 26pc in Germany and 28pc in
Britain).
Medef’s Laurence Parisot had some strong words, as I reported then. "The situation is
very serious. Some business leaders are in a state of quasi-panic. The pace of
bankruptcies has accelerated over the summer. We are seeing a general loss of
confidence by investors. Large foreign investors are shunning France
altogether. It’s becoming really dramatic."
She said Hollande has yet to understand the "extreme gravity"
of the crisis. Or rather, he has misunderstood it. He has embraced austerity
but not reform, the worst possible mix.
The government will tighten fiscal policy by 2pc of GDP next year, with
two-thirds coming from higher taxes. This ignores the lessons of reform around
the world over the last half century that tax rises to do more damage in a
slump than spending cuts.
The French state is gobbling up 55pc of GDP, similar to Sweden and
Demark but without their free market system. Nothing is being done to tackle
this.
The word you hear again and again these days in the City is that France
is on borrowed time. Nobody knows when that shoe will drop, but the economy
will almost certainly crash into recession over the winter, if it has not
already. It will then remain stuck in perma-slump, much like Italy. The housing
bubble will deflate a lot further (unlike Italy, which never had a housing
bubble)
And remember, France no longer has its own currency and sovereign
monetary control levers. It is at the mercy
of others.
As of today, 10-year Italian bond yields are 262 basis points over
French yields. Why?
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